Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

The Real Estate Bill - An Overview

By Shagun Jain

The real estate sector in India, despite its large size and numerous players still remains outside regulatory purview and discipline and continues to be in the unorganized sector. One sided contracts in favor of the builder, large cash transactions, lack of standardization and quality and delay in delivery of completed projects continue to plague this unorganized sector. The Central Government introduced the Real Estate (Regulation and Development) Bill, 2013 (“the Bill”) in the Rajya Sabha on August 14, 2013 with the objectives of  protecting  the interest of the consumers, promote fair play in real estate transactions and ensure timely execution of the projects.

Scope of the Bill

The Bill is applicable only to residential real estate projects. However, it does not bring under its ambit projects where the land area proposed to be developed is limited to a maximum of 1000 sq. mts. or the number of apartments proposed to be developed is limited to 12 (inclusive of all phases). This limit may vary between States/UTs but in no case will be more than the aforementioned limits.

Important definitions

The Bill proposes to standardize the commonly used terms in the sector by defining ‘apartment’, ‘common areas’, ‘carpet area’, ‘advertisement’, ‘real estate project’, ‘prospectus’ etc. The Bill also introduces an important concept of sale of apartments only on the basis of ‘carpet area’ which makes sale on basis of ‘super built up area’ (often used to mislead buyers) non-existent.

Establishment of RERA & REAT

The Bill proposes to establish a Real Estate Regulatory Authority (“RERA”) in each State or jointly for two or more States by the 'Appropriate Government'. The Bill specifies the functions, powers, and responsibilities of the Authority such as exercising supervision over real estate transactions, appointing adjudicating officers for settlement of disputes and imposition of penalty and interest. The Authority would be empowered to impose penalties on the developers for violations of the Bill, including imprisonment up to 3 years. Further, establishment of a Real Estate Appellate Tribunal, constituting of a sitting or retired judge of the High Court, one additional judicial and one administrative/technical member, has been envisaged, to hear appeals from the orders or decisions or directions of RERA and/or the adjudicating officer.

Registration of real estate agents and projects

It is compulsory for all agents, who intend to sell any immovable property, to register themselves with the RERA. This move is aimed to protect buyers/customer from frauds. Further, it is mandatory for promoters to register their projects after receiving all approvals from development/municipal authorities.

Duties of promoters

It will be mandatory for promoters to upload information relating to the registered project on the RERA's website, such as details of promoters, layout plan, land status, carpet area, status of statutory approvals, details of real estate agents, contractors, architect, structural engineer etc. Additionally, promoters have to provide (to RERA), the proposed advertisements relating to the project, formats of the agreements to be executed with buyers and lists of bookings in the project on the basis of the agreements with proposed buyers. This will further protect the interest of the buyers and avoid hardship due to one-sided agreements. The promoters have to comply with obligations relating to veracity of the advertisement for sale or prospectus, responsibility to rectify structural defects, and to refund money in cases of default.

Advances and Agreement of Sale

Promoters are restricted from accepting more than 10% of the "cost of apartment, plot or building" as advance without a written agreement of sale with the proposed buyer. The agreement must have all the relevant details with regard to the project as prescribed under the Bill. The practice of pre-launch booking of the projects will come to an end. However, interestingly, cost of apartment has not been defined in the Bill and therefore there is lack of clarity on the components that may be included by the developer/promoter in such cost to be recovered as an advance from the proposed buyers.

Mandatory escrow account

Promoters have to compulsorily deposit 70% or such lesser percent, as notified by the appropriate government, of the amounts realized from the allottees/buyers, for the purposes of the concerned project only, within 15 days of realization of the moneys.

Rights and duties of allottees

Allottees have been empowered to obtain information relating to the property booked, to know stage-wise time schedule of project completion, to claim possession of the apartment/ plot/building as per promoter's declaration, to claim refund with interest in case of default by the promoter, and to obtain necessary documents and plans after possession. Allottees have the duty to make necessary payments and carry out other responsibilities as per the sale deed.

Positive aspects of the Bill

It is hoped that the Bill will bring in a measure of standardization in the sector leading to the orderly growth of the industry through introduction of standard definitions, methodology (for sale, registration, documentation, disclosures and filings) across the sector.  The Bill aims at consumer protection by making it mandatory for promoters to register all projects, prior to sale and only after having received all approvals from development/municipal authorities.

The Bill will ensure timely completion of projects and prevent fund diversion. Presently, the real estate market has experienced innumerable delays in project approvals and completion, thereby delaying delivery of possession of the apartments. However, the Bill has strict regulations in place to ensure timely completion of the projects and delivery of apartments as per schedule to the buyers. In case of long delays, the buyers will be entitled to a full refund with interest. The Bill provides for a speedy and specialized adjudication mechanism to settle disputes between promoters, buyers and real estate agents, thereby de-clogging the civil courts and consumer forums, from disputes in the real estate sector.

The Bill makes it difficult to cancel a sale. Developers will not be allowed to cancel an agreement for sale unless they have sufficient cause to do so. In case there is structural defect or deficiency in the development of a building, the Bill allows the buyers to approach the developer for after sales service for a period of 2 years after delivery of possession. The Bill prohibits any pre-launch bookings by the developers. Usually developers commence sale of units much before obtaining mandatory approvals, which later proves to be a hassle for the buyers in case the approvals are delayed/not obtained. Now it is only after registration that an issuance of advertisement or booking of units would be permissible by the promoters.

Criticisms

The Bill covers only residential projects and it is applicable only to new real estate projects. Hence, projects sold prior to enactment of the Bill, which might still be in the process of obtaining clearances or which raised money on the basis of pre-launch are not included in the Bill. There are many buyers who would be deprived of the benefit of this Bill due to exclusion of past projects. There is lack of clarity on delays due to approvals/clearances from government departments as developers might be penalised or face financial loss due to no fault of theirs. Registration with RERA is not mandatory for projects covering less than 1000 square meters. Hence many small developers across metros like Mumbai, Bangalore, etc. may escape from registration requirements and regulator's control. New residential projects can be launched only after getting requisite clearances from the government, which ideally takes 2 to 3 years. Therefore, in short term there will be delays in the launch of new projects.

The Bill does not regulate 'construction' which is the domain of States and urban local bodies. The main concern of the developers is the need for a single window system for project approvals and clearances, for which the Ministry of Housing and Urban Poverty Alleviation has constituted an Expert Committee represented by industry bodies to recommend to the States on ways and means to set up a single window system. As far as the Bill is concerned, its mandate is limited to transactions, and thus regulates all parties involved in it.

Issues that remain unaddressed

The Bill does not recognise that the promoter, the agent and the allottee are not the only three players in the project. This chain includes the landowner, an attorney who investigates titles, the developer, the architect, the structural engineer, the approving authority, the contractor, the project manager who supervises construction, the agent and the purchaser. Registering only the developer and the real estate agent, and their projects, and expecting that this registration will bring about transparency and solve all problems, is a narrow approach.

The RERA should help the industry, both for ownership and rental. It should work with government and local authorities to improve coordination and expedite the grant of construction permissions, minimising the number of agencies giving clearances. It should present an annual report on its performance, just as companies do with their shareholders.               The government should take measures to ensure easy funding for developers. It should initiate institutional funding to the developers so that more realty projects are encouraged. The Bill lacks any mention of a single window clearance to enable speedier approvals and permissions for the developer projects.

Concluding remarks

The impact of the proposed regulatory Bill can be only assessed over time as to whether it is able to effectively address the issues facing the housing sector including standardization of sale agreements, efficacy in resolution of complaints and encouragement of private equity through effective regulations. This would also depend on the Government’s commitment to regulate growth of the real estate housing sector. If implemented in its true spirit with requisite additions to the Bill, it may prove be a boon for the real estate sector and consumers.

[ The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi  ]
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